In this article, I’m going to explain interest rates and penalties in full.
Current Reverse Mortgage Interest Rates
1-year – 5.64%
3-year – 5.84%
5-year – 6.24%
I occasionally receive a call which goes something like this:
“What are the interest rates on a reverse mortgage”…this call is cut and dry, the caller is only interested in interest rates. But they are missing out on a critical piece of information that I can provide: how a reverse mortgage can dramatically improve your retirement lifestyle.
5000 Inquiries Per Month
If you’re going to make a call to inquire solely about interest rates, you might as well call HomEquity Bank’s call centre, which receives over 5000 calls per month from Canadians interested in a reverse mortgage. The call centre will read you a well rehearsed script about current rates, fees, and then try and book you a meeting with a salesman.
But if you do this, you’ll be missing out on learning why a reverse mortgage is what I call a “lifestyle mortgage”. At first glance, you will notice the rates are about 2% higher than a traditional mortgage or secured line of credit. But there is a good reason for this. A reverse mortgage is not a traditional mortgage or secured line of credit, which are both highly protective of the lender. With a reverse mortgage, the lender assumes a much higher degree of risk and therefore will charge a slightly higher interest rate.
Why Interest Rates Are Slightly Higher
HomEquity Bank, Canada’s only national provider of reverse mortgages, is a Schedule I, federally regulated bank. They raise capital exactly the same way as the other banks, by selling GIC’s and long term notes. Like any other bank in Canada, capital raised is then lent and profit is made on the spread.
But unlike a traditional mortgage, HomEquity Bank provides much higher safeguards to the borrower, takes on all the risk and therefore will charge a slightly higher rate. Consider the following:
No payments are required – EVER! The average client in Canada has a reverse mortgage with HomEquity Bank for 7 – 10 years. That’s a long time for a loan never to receive a payment.
No risk of default – with no payments required, you can never default on your loan. Imagine never worrying about making another mortgage payment or never having to worry the bank will foreclose on your home?
No option to call your loan – once approved for a reverse mortgage, you are approved for life. And if there is a downturn in housing prices, or if your spouse passes away and your income drops, your loan can never be called. This built in protection is not offered on a secured line of credit, which can be called at any time
Why Choose A Lifestyle Mortgage?
Canadians 55yr+ are choosing a reverse mortgage over any other mortgage products I can offer, for the following “lifestyle” reasons:
- Cash Flow – no payments frees up monthly cash flow to be used to enjoy your retirement and to do things you want to do while you are healthy
- Travel – more monthly cash-flow allows you to travel more. Whether it’s booking a cruise, or taking the grandkids to Disney, having the $ to travel more is all about retirement lifestyle
- Gift to Kids & Grandkids – helping them out now vs. leaving an estate you can never see them enjoy
- New Car – yes, it may seem frivolous to purchase a brand new car while you’re retired, but just because you are no longer working, doesn’t mean you have to drive around in an old vehicle that is constantly needing repair and a worry to be taking out on the roads in the winter
- Renovation – so you’ve decided to stay in your home for the next 5 – 10 year…why not add some value back into the home and renovate the kitchen & bathrooms? The renovation will increase the value of your home and increase your enjoyment of living there. Win – win!
- Purchase Investments – there are many excellent dividend paying stocks and mutual funds that can provide you with a steady, monthly, passive income stream. And if you use the reverse mortgage to purchase investments, the interest, although not payable, becomes tax deductible.
- Purchase a Rental Property – again, providing you with steady, monthly cash-flow, and again, if you use the reverse mortgage to purchase an rental property, interest becomes tax-deductible
The list can go on! At the end of the day, you need to ask yourself what your retirement lifestyle is worth to you? Is it about interest rates that are slightly higher? (Hint: it shouldn’t be!) Or the freedom to stay in your home, and create a retirement lifestyle for yourself that you can enjoy while you are healthy?